Decision Making and the Price Setting Newsvendor: Experimental Evidence

Kocabıyıkoğlu, Ayşe, Göğüş, Celile Itır and Gönül, Sinan (2016) Decision Making and the Price Setting Newsvendor: Experimental Evidence. Decision Sciences, 47 (1). pp. 157-186. ISSN 0011-7315

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We present an experimental study of the price-setting newsvendor problem, which extends the traditional framework by allowing the decision maker to determine both the selling price and the order quantity of a given item. We compare behavior under this model with two benchmark conditions where subjects have a single decision to make (price or quantity). We observe that subjects deviate from the theoretical benchmarks when they are tasked with a single decision. They also exhibit anchoring behavior, where their anchor is the expected demand when quantity is the decision variable and is the initial inventory level when price is the decision variable. When decision makers set quantity and price concurrently, we observe no significant difference between the normative (i.e., expected profit-maximizing) prices and the decision makers' price choices. Quantity decisions move further from the normative benchmarks (compared to when subjects have a single decision to make) when the ratio of cost to price is less than half. When this ratio is reversed, there is no significant difference between order levels in single- and multi-task settings. In the multidecision framework, we also observe a tendency to match orders and expected demand levels, which subjects can control using prices.

Item Type: Article
Uncontrolled Keywords: Behavioral operations management, Price-setting newsvendor problem
Subjects: N100 Business studies
N200 Management studies
Department: Faculties > Business and Law > Newcastle Business School
Depositing User: Ay Okpokam
Date Deposited: 10 Jan 2018 11:39
Last Modified: 19 Nov 2019 09:48

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